The chart of accounts (COA) is a listing of the general ledger account names and identification numbers arranged in the order in which they customarily appear in financial statements. It can also include a description of what should be included in each account. The COA is a key accounting tool used for transaction processing, accounting activities, reconciliations, and financial reporting.
A COA with too many accounts can create headaches for finance teams. It leads to more review time, more reconciliations, additional system maintenance, and greater chances for coding errors to occur. After reviewing cross-industry data on the number of accounts that organizations tend to have in their COA, we highlight some of the challenges of an oversized COA and provide guidance for how leading organizations trim and prevent excess accounts.
APQC finds that organizations at the 25th percentile have 180 or fewer accounts in their COA. Organizations at the 75th percentile have more than three times the number of accounts with 680 or more.
When APQC transitioned to a new ERP system a few years ago, the most challenging part of the project by far was cleaning up our COA. With more than 5,000 accounts, we weren’t just in the 75th percentile for this measure — we were well above the number that many 75th-percentile organizations have.
How did our COA get so bloated? It happens more easily than you might think. In the past, for example, we often met ad hoc reporting requests by simply adding additional accounts, subaccounts, and project numbers to our COA without thinking through the consequences.
Since comparing numbers to the prior period is one of accounting’s key analysis techniques, we rarely eliminated any accounts. This bad habit allowed the number of accounts in our COA to proliferate quickly over the years. I can tell you from experience that trying to get ready for an independent audit when you have so many accounts in your COA is a nuisance that you don’t want (and it certainly does not add any value in serving customers).
An oversized COA could also add to your monthly and year-end close cycle times. Having to reconcile and investigate the potentially numerous account variances from a mushrooming COA is a time-consuming and tedious endeavor. The time spent on this activity not only drives up the time needed to close the accounting period in your system but can also delay the time to report on the respective period’s financials.
While there’s no best-practice number of accounts for the COA, an oversized chart of accounts can make reporting, reconciliations, and accounting much more difficult than they need to be and ultimately adds to the process cost of general accounting. Organizations should work to make their COA as small and streamlined as possible to avoid unnecessary accounting problems down the road.
Regular maintenance of the COA is one of the most effective ways to guard against proliferation. Rather than waiting until a project requires COA cleanup, CFOs or controllers should perform periodic (at least annual) reviews of the COA and eliminate inactive accounts as needed.
Accounts with little or no balance in them can be a sign that reduction and simplification are needed. For example, when I examined APQC’s COA, I found that around 4,500 of the 5,000 accounts had little activity and a balance of ten dollars or less. They may have initially been used to report performance on a new project or business line, but after some initial period, they were no longer active. If a high percentage of the accounts in your COA have little activity or a low balance, you might have some streamlining and reduction to do.
Work toward a streamlined and simplified COA today by conducting periodic reviews and trimming any inactive accounts as needed.
It’s important to establish governance mechanisms for how transactions need to be categorized and reported to internal and external stakeholders. Any additions, deletions, and modifications made to the COA should be the outcome of a disciplined process with oversight from a process owner. In large organizations, this is often a centralized process maintained by the corporate controller.
Let the reporting needs of internal stakeholders (such as operations leaders) and external stakeholders such as (investors and creditors) drive the changes your organization makes to the COA. If the current categorization of transactions onto the COA does not allow for clear reporting to stakeholders, then you should consider how changes can be made to help your stakeholder audiences gain better information from internal and external reports.
A COA with too many accounts can make for all sorts of problems, from increased process costs for general accounting to difficulty in reconciliations and reporting. Work toward a streamlined and simplified COA today by conducting periodic reviews and trimming any inactive accounts as needed. Take it from me, preventative maintenance along the way is much better than the lengthy and time-consuming interventions you might need if you neglect your COA.
Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston, Texas.